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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: shares accounted for as liabilities: unallowable purposes

Unallowable purpose

In order to ensure that the rules relating to shares accounted for as liabilities only apply to arrangements that seek to secure a tax advantage for the holder of the shares, it is a condition that the rules can only apply where there is an ‘unallowable purpose’.

An ‘unallowable purpose’ is defined in CTA09/S521E(1) as being that the share is held…

‘…for an unallowable purpose if the main purpose, or one of the main purposes for which the company holds the share is to secure a relevant tax advantage’.

A ‘relevant tax advantage’ is defined at CTA09/521E(4) as being…

‘…that the return produced by the share (or any part of it) is received in a way that means that its treatment for corporation tax purpose is more advantageous to the investing company than it would be if it were (a) charged to corporation tax as income of the investing company, or (b) brought into account as income of the investing company for corporation tax purposes.’

This means that unless a purpose of avoiding corporation tax can be established, then the shares accounted for as liabilities rules cannot apply. Consequently, the shares accounted for as liabilities rules should not inadvertently catch commercially-driven transactions with no corporation tax avoidance motive that just happen to fall within the other specific conditions for those rules to apply.


There may be circumstances when a company would prefer for a shareholding to fall within the rules relating to shares accounted for as liabilities but the shareholding will not because it was not held as part of an arrangement to obtain a relevant tax advantage. Consequently, companies have the option of electing out of the unallowable purpose test so that they are within the shares accounted for as liabilities rules regardless of their motive of entering into the arrangements.

Such an election must be made no later than the time when the investing company first holds the share or, if later, when the share begins to produce a return to the investing company. Once such an election is made, it is irrevocable.